The problems of capitalism

The major article in the most recent Foreign Affairs entitled “Capitalism and Inequality” argues that “Recent political debate in the United States and other advanced capitalist democracies has been dominated by two issues: the rise of economic inequality and the scale of government intervention to address it. As the 2012 U.S. presidential election and the battles over the ‘fiscal cliff’ have demonstrated, the central focus of the left today is on increasing government taxing and spending, primarily to reverse the growing stratification of society, whereas the central focus of the right is on decreasing taxing and spending, primarily to ensure economic dynamism. Each side minimizes the concerns of the other, and each seems to believe that its desired policies are sufficient to ensure prosperity and social stability. Both are wrong”.

It goes to say “Inequality is indeed increasing almost everywhere in the postindustrial capitalist world. But despite what many on the left think, this is not the result of politics, nor is politics likely to reverse it, for the problem is more deeply rooted and intractable than generally recognized. Inequality is an inevitable product of capitalist activity, and expanding equality of opportunity only increases it”. While he is correct in the sense that inequality is rising, with both the bottom and middle suffering the most with the very wealthiest losing least, or in many cases, actually gaining. It would be wrong to say that the only reason for this was capitalism but the kind of capitalism that has been worshipped over the last 20 years, or maybe more, has greatly worsened the level of inequality in many societies. This change in capitalism has itself come about with as a result of the changing nature of the economy and the work that more people are doing. It is far more skilled, even at low levels than it was previously which in turn has meant greater emphasis on education. Yet while many more than ever before have gained university degrees the wealthiest have gone further still thereby enhancing their advantage. There is nothing wrong with parents doing this for their children but there must then be a counter balance to this in order to mitigate and lessen this effect.

He goes on to write “Despite what many on the right think, however, this is a problem for everybody, not just those who are doing poorly or those who are ideologically committed to egalitarianism — because if left unaddressed, rising inequality and economic insecurity can erode social order and generate a populist backlash against the capitalist system at large”. He rightly praises capitalism for raising living standards and reducing poverty but goes on to warn “Capitalism’s intrinsic dynamism, however, produces insecurity along with benefits, and so its advance has always met resistance. Much of the political and institutional history of capitalist societies, in fact, has been the record of attempts to ease or cushion that insecurity, and it was only the creation of the modern welfare state in the middle of the twentieth century that finally enabled capitalism and democracy to coexist in relative harmony”.

He goes on to state rather controversially “If capitalism has opened up ever more opportunities for the development of human potential, however, not everyone has been able to take full advantage of those opportunities or progress far once they have done so. Formal or informal barriers to equality of opportunity, for example, have historically blocked various sectors of the population — such as women, minorities, and the poor — from benefiting fully from all capitalism offers. But over time, in the advanced capitalist world, those barriers have gradually been lowered or removed, so that now opportunity is more equally available than ever before. The inequality that exists today, therefore, derives less from the unequal availability of opportunity than it does from the unequal ability to exploit opportunity”.

He adds “All this progress, however, has been shadowed by capitalism’s perennial features of inequality and insecurity. In 1973, the sociologist Daniel Bell noted that in the advanced capitalist world, knowledge, science, and technology were driving a transformation to what he termed “postindustrial society.” Just as manufacturing had previously displaced agriculture as the major source of employment, he argued, so the service sector was now displacing manufacturing”.

He rightly goes on to mention the role of the family in society and its subesquent economic effects, “In the United States, among the most striking developments of recent decades has been the stratification of marriage patterns among the various classes and ethnic groups of society. When divorce laws were loosened in the 1960s, there was a rise in divorce rates among all classes. But by the 1980s, a new pattern had emerged: divorce declined among the more educated portions of the populace, while rates among the less-educated portions continued to rise. In addition, the more educated and more well-to-do were more likely to wed, while the less educated were less likely to do so. Given the family’s role as an incubator of human capital, such trends have had important spillover effects on inequality. Abundant research shows that children raised by two parents in an ongoing union are more likely to develop the self-discipline and self-confidence that make for success in life”.

He goes on to argue that education is not necessarily the answer “even though a higher percentage of Americans are attending college, they are not necessarily learning more. An increasing number are unqualified for college-level work, many leave without completing their degrees, and others receive degrees reflecting standards much lower than what a college degree has usually been understood to mean”, he adds “formal schooling itself plays a relatively minor role in creating or perpetuating achievement gaps”.

The answer to this he says is not greater redistribtuion which he argues “has two drawbacks, however. The first is that over time, the very forces that lead to greater inequality reassert themselves, requiring still more, or more aggressive, redistribution. The second is that at some point, redistribution produces substantial resentment and impedes the drivers of economic growth. Some degree of postmarket redistribution through taxation is both possible and necessary, but just how much is ideal will inevitably be contested”.

Whatever about his idea that greater redistribution will mean more redistrubition the second point that it “impedes the drivers of economic growth” is laughable.

The second solution which he also rejects is “using government policy to close the gaps between individuals and groups by offering preferential treatment to underperformers, may be worse than the disease. Whatever their purported benefits, mandated rewards to certain categories of citizens inevitably create a sense of injustice among the rest of the population. More grave is their cost in terms of economic efficiency”. Again this logic is questionable, to say the least.

The recommended cure for capitalism, he says, is more capitalism, “encouraging continued economic innovation that will benefit everybody, is more promising. The combination of the Internet and computational revolutions may prove comparable to the coming of electricity, which facilitated an almost unimaginable range of other activities that transformed society at large in unpredictable ways. Among other gains, the Internet has radically increased the velocity of knowledge, a key factor in capitalist economic growth since at least the eighteenth century. Add to that the prospects of other fields still in their infancy, such as biotechnology, bioinformatics, and nanotechnology, and the prospects for future economic growth and the ongoing improvement of human life look reasonably bright. Nevertheless, even continued innovation and revived economic growth will not eliminate or even significantly reduce socioeconomic inequality and insecurity, because individual, family, and group differences will still affect the development of human capital and professional accomplishment”.